Underwriting Home Care Cooperatives

A Guide to Support Investment Decisions and Bring Home Care Cooperatives to Scale

This guide serves as a foundational document

for lenders and impact investors considering
providing financial support to private duty
home care cooperative agencies. The goal of
this guide is to acclimate potential financial
underwriters to the home care cooperative
business model and provide an overview of
typical debt and capital needs.
 Acknowledgments

Capital Impact Partners thanks our partners,

including The ICA Group and Margaret Lund,
for sharing their knowledge and expertise by
authoring this guide.

A special thank you to the AARP Foundation

for supporting the replication of the innovative
home care cooperative model.

IC A GR O U P

Underwriting Home Care Cooperatives Page 1

 Table of Contents

Acknowledgments........................................................................................................................................................................................ 1

Introduction.......................................................................................................................................................................................................3
What is a home care cooperative, and how do they operate?....................................................................... 3

Industry Benchmarks for the Home Care Industry....................................................................................................5

Revenue and Expenses.................................................................................................................................................................................5
Benchmarks...........................................................................................................................................................................................................5
Balance Sheet......................................................................................................................................................................................................5
Recruitment and Retention....................................................................................................................................................................... 6

Home Care Revenue..................................................................................................................................................................................7

Public Pay................................................................................................................................................................................................................7
Private Pay............................................................................................................................................................................................................. 8
Average Public and Private Pay Rates.............................................................................................................................................. 8
Business Lines and Diversification Opportunities.................................................................................................................... 8

Credit Quality Metrics............................................................................................................................................................................ 9

How are cooperatives different?........................................................................................................................................................... 9
Character.............................................................................................................................................................................................................. 10
Capacity................................................................................................................................................................................................................ 10
Capital..................................................................................................................................................................................................................... 10
Collateral................................................................................................................................................................................................................. 11
Conditions.............................................................................................................................................................................................................. 11

Debt and Capital Needs...................................................................................................................................................................... 12

Start Up.................................................................................................................................................................................................................. 12
Operations/Cash Flow/Working Capital........................................................................................................................................ 13
Expansion............................................................................................................................................................................................................. 14

Key Financing Opportunities......................................................................................................................................................... 15

Increasing Demand........................................................................................................................................................................................ 15
Cooperative Advantage.............................................................................................................................................................................. 15
Conversions......................................................................................................................................................................................................... 15
Franchise Model............................................................................................................................................................................................... 15

Lender Recommendations................................................................................................................................................................16

APPENDICES................................................................................................................................................................................................... 17
Appendix A: Democratic Governance Overview..................................................................................................................... 17
Appendix B: Map of Operational U.S Home Care Cooperatives.................................................................................. 18
Appendix C: Public Pay Overview...................................................................................................................................................... 18
Appendix D: Patronage Allocation—A Primer......................................................................................................................... 20
Appendix E: Home Care Cooperative Case Studies: A Tale of Two Start Ups.................................................. 23
Appendix F: State-Based Opportunities....................................................................................................................................... 25

Underwriting Home Care Cooperatives Page 2

 Introduction
With a rapidly aging population and an
increased demand for in-home care, the home
care industry is experiencing significant growth.
In parallel, home care cooperatives have
emerged as a solution to increased demand
for high-quality, in-home care for seniors and
adults living with disabilities. The purpose of
this guide is to introduce potential lenders to
the home care cooperative industry and the
industry’s specific financing needs.
This guide provides an overview
of the following key areas:
➊ Current landscape of home care cooperatives
➋ Industry benchmarks for the home
care industry
➌ Revenue sources in home care
➍ The five Cs of credit and how they apply to
home care cooperatives
➎ Debt and capital needs of home care
cooperatives and the opportunities and
challenges these present for prospective lenders
The
Membership
Elects the Board on a
one person, one vote
basis. Makes changes
to by-laws.
Underwriting Home Care Cooperatives
What is a home care cooperative,
and how do they operate?
At their most basic level, cooperatives
are simply businesses that are owned
and controlled by the people who benefit
from them. Worker-owned cooperatives,
including those providing home care services,
are businesses that are both owned and
controlled by the employees of the business
who voluntarily elect to join the cooperative.
Worker-owned cooperatives are democratically
governed, with every member having one
equal vote to decide upon important issues.
The board of directors (typically comprised
of worker-owners) of the cooperative are
elected by the worker-owners, and the board
is responsible for setting policy and hiring and
supervising management. Management ensures
that policy is carried out, hires and supervises
staff, and oversees most day-to-day operations.
For more information on democratic
governance see Appendix A.
Board of Directors
Sets policy, selects
and supervises the
General Manager/CEO
Management
Ensures policy is carried out,
hires and supervises staff
Page 3
In worker-owned cooperatives, profits (and
losses) from the business are allocated to
the worker-owners based upon the method
selected by the cooperative - either gross
pay or hours worked. The dual benefits of
having a voice in important decisions of the
business and sharing in the rewards of success
are two critical differences between worker-
owned cooperative businesses and traditional
businesses or not-for-profits.
care cooperatives focus on non-medical personal
and household care (bathing, dressing, meal
preparation, grocery shopping etc.) as opposed
to more medically focused home health care,
though the larger cooperative agencies also offer
home health services.

While the governance and ownership structure

of home care cooperatives differ from
conventional business enterprises, the day-
to-day operations and financial management
of a home care cooperative are no different
than a traditional home care agency. Home
care cooperatives still succeed or fail based
on their ability to develop a competitive
advantage in the marketplace. Generally, this is
through providing higher quality care, offering
a service or combination of services for which
there is unmet demand, a lower price point, or
some combination of all three. Where home
care cooperatives typically outperform their
competition is in providing higher quality care.
By their very nature, home care cooperatives
emphasize engagement, positive treatment,
and support of caregivers. Caregivers that are
engaged, respected, and supported are happier
in their jobs and remain on the job for longer
periods, significantly improving employee
retention. In an industry with an average annual
turnover rate of 67%, maintaining consistent,
quality care is a challenge. Those that can
retain quality caregivers can offer higher
quality care for clients.

As of June 2018, there were 11 cooperative

home care agencies in operation across the
U.S., with at least two more set to launch within
the year and several additional cooperatives
under development in markets across the
country. See Appendix B for a map of U.S
home care cooperative agencies. These 11
home care cooperatives collectively employ
approximately 2,500 workers, including both
worker-owners and non-owner employees.
With more than two million home care workers
nationally, this represents 0.12% of the total
home care workforce. Existing cooperatives
range in size from start-up organizations with
only 5-10 caregivers to Cooperative Home Care
Associates (CHCA) in the Bronx, the largest
worker-owned cooperative in the country with
over 2,000 caregivers. The majority of home

Underwriting Home Care Cooperatives Page 4

 Industry Benchmarks for the Home Care Industry
Revenue and Expenses
The home care industry has seen consistent
growth over the last five years with expectations
that demand will only increase. While there is
some risk that changes in Medicare and Medicaid
will reduce the long-term industry outlook, these
risks are generally outweighed by the long-term
growth in demand from an aging population.
Like many service industry businesses, the
primary expenses for home care agencies are
wages and other personnel costs. The 2018
Home Care Pulse Benchmarking Survey found
that wages accounted for 52.4% of home care
agency expenses, with the median total cost of
direct care personnel reaching 60.9%.1 Of the
remaining median gross profit margin of 39.1% of
revenue, overhead typically accounted for 15.8%,
with non-operational expenses such as interest
and owners’ salaries totaling 3.3% of revenue.
The survey found minor variation in these
Key Expenses (% of Revenue)
Non-Operating 3.3%
Other Admin 4.5%
Office Support Wages 7.9%
Rent, Maint., & Util. 1.6%
Marketing 1.8%
Other Direct Care 8.5%
Wages 52.4%
Industry
1
Home Care Benchmarking Study (2018). Home Care Pulse.
Underwriting Home Care Cooperatives
percentages across home care agencies by size,
with the only significant difference being a small
decrease in non-wage personnel costs for the
largest agencies (sales of $2.8 million or more).
While often lumped into direct care expenses,
travel expenses are an important factor in
calculating cost of services in the home care
industry. These expenses vary significantly based
on the location of a cooperative or agency.
Among home care cooperatives, travel expenses
can be as high as 7% of total revenue in a rural
cooperative and as low as 1% in a cooperative
located in a dense city or town. These expenses
can vary widely and change frequently based
on the location of specific clients and specific
funder requirements. In Wisconsin, for example,
Medicaid-funded managed care organizations
require home care agencies to visit clients for
multiple shorter visits rather than longer, single
visits, but do not fully cover the additional
travel costs. A well-run home care agency or
Non-Operating 0.1%
Other Admin 2.7%
Office Support Wages 9.6%
Rent, Maint., & Util. 1.0%
Marketing 0.2%
Other Direct Care 8.9%
Wages 60%
Coop
Page 5
cooperative will track changes in travel expenses
over time and adjust schedules accordingly to
prevent these costs from eroding its gross margin.
With low fixed costs, most home care agencies
have few expenses that can be reduced outside
of caregivers’ wages (or owners’ profit). Some
operational improvements may be gained
through improved scheduling and coordination;
however, these lead to only modest decreases in
expenses at best. On the other hand, given that
caregivers must travel to their clients’ homes to
provide services, travel expenses are an item that
can easily balloon. For agencies serving rural
communities, it is vital for home care agencies to
monitor and keep mileage costs in check.
Benchmarks
In general worker-owned cooperatives are subject
to the same industry environment and market
conditions as more traditional home care businesses.
Because of this, the financial and operational
benchmarks that apply to home care agencies also
apply to home care cooperatives. Differences in
benchmarks are driven primarily by the size, location,
and revenue of an agency rather than whether a
business is a cooperatively owned or traditionally
owned agency. A small, rural, private pay home
care cooperative is more financially comparable to
another rural private pay agency than to a large
urban public pay cooperative, for example.
Worker-owned home care cooperatives differ from
the typical industry scenario in one key respect:
because co-ops are owned by their direct care
workers and not by an outside owner, the incentive
for co-ops is to pay as high a wage as prudently
possible to caregivers. This tends to decrease
cooperative agencies’ average gross margin by
several percentage points relative to industry
peers, but given the mission and values of the
business, this is not seen as a negative outcome.
Balance Sheet
Home care agencies, like many service sector
businesses, have very modest capital needs,
spending on average $.02 on capital goods
for every $1.00 spent on labor. In a labor-
2
M. Guattery, Home Care Providers in the U.S. (IBISWorld, 2017).
3
The estimated direct cost of replacing a nursing assistant or home care worker is $2,200 per employee.
4
Growing a Strong Direct Care Workforce: A Recruitment and Retention Guide for Employees, Paraprofessional Healthcare Institute (2018).
Underwriting Home Care Cooperatives
intensive industry with few fixed assets, home
care agencies must be particularly adept at
managing their current assets such as cash and
accounts receivable. According to the most
recent IBIS world report on the industry, on
average, cash accounts for 24.6% of assets while
net receivables account for an additional 28.1%.2
The average current ratio in the home care
industry—an important ratio for businesses that
must stay liquid—is 2.0. Managing cashflow is
extremely important in the home care industry
where poor receivables collection can have dire
consequences. The average collection period for
receivables in the industry is 33.5 days, although
this can be as much as 60 days for certain
public payers or private insurances. Agencies
must be sure to have enough working capital on
hand to meet payroll during this time lag.
Recruitment and Retention
Although not generally an important benchmark
in most industries, staff recruitment and retention
are of utmost importance in the home care
industry. Caregiving is a demanding job, both
physically and mentally. Wages are low across the
country and the sector, even in the private pay
market, is significantly influenced by low public
reimbursement rates (see page 6). In addition,
benefits are rare, hours and schedules are often
erratic and unpredictable, and training and
supports are typically inadequate. Staff turnover
is, therefore, extremely high in the industry and
has been steadily increasing over time. In 2017,
caregiver turnover was 66.7%, up from 53.2% in
2013, meaning a typical home care agency’s direct
care workforce completely turns over every year
or two. The average tenure for a caregiver is 15
months nationally, and of those who quit in their
first year, 57% do so within the first three months.
Home care cooperatives that have been able to
turn the advantages of member ownership and
governance into better caregiver retention not
only save on the costs of recruiting new caregivers,
they also gain from having more experienced
caregivers who can build long-term relationships
with their clients and provide better quality
care.3,4 Most established home care cooperatives
have a staff turnover rate of 40% or lower, with
several worker-owned agencies as low as 20%, a
significant differentiator in the marketplace.
Page 6
 Home Care Revenue
In the home care industry, revenue comes from
two basic sources. The first is public payers,
typically Medicaid mediated through programs
in each individual state; the second is from
private payers, including both clients who pay
out of pocket and those with long-term care
insurance. The public pay market dominates
the industry accounting for over 75% of the
industry’s $92.5 billion in annual revenues. The
remaining 25% comes from a mix of private
sources, including long-term care insurance at
10.6% and out of pocket pay at about 10%.5
Public Pay
Dually funded by the federal government and
individual states, Medicaid provides financial
support for health care services for low-income
individuals, including elderly and disabled
individuals requiring long term care. To be eligible
for Medicaid benefits, individuals must meet
federally mandated financial and asset criteria.
Medicaid-funded long-term care programs vary
significantly in scale and scope by state, but
every state is required to offer home-based care
as part of their suite of services. Currently there
are two types of payment systems through which
agencies are reimbursed through the Medicaid
program: Capitated Payments or Fee-For-Service
payments. Depending on the state the home
care agency works in, they will be reimbursed
through one of these two payment systems. While
rates vary widely by state, Medicaid home care
is artificially low in all states, requiring home care
agencies to either pay low wages and/or pursue
significant scale to take advantage of efficiencies
of scale. However, as Medicaid represents more
than 70% of home care revenue nationally, it
remains an important payment source for most
home care agencies, particularly those of scale.
Currently, three of the 11 existing home care
cooperatives service Medicaid clients, including
the two largest cooperative agencies.
In addition to Medicaid, the U.S. Department
of Veterans Affairs (VA) is another important
public home care payer, and some existing home
5
M. Guattery, Home Care Providers in the U.S. (IBISWorld, 2017).
Underwriting Home Care Cooperatives
Home Care Payment Sources
Long-term Care
Insurance 10.6%
Out of
Pocket 10%
Other
4.4%
Public Pay 75%
care cooperatives do service the VA. The VA
contracts directly with individual home care
agencies to provide home-based services to
qualified veterans. Like the Medicaid program,
these services cover a wide range of activities
of daily living. The VA typically pays higher
rates than Medicaid (VA rates also vary by
state); however, the VA is known for slow and
unpredictable payments, which can cause
cash flow issues for provider agencies. On
January 3, 2018, the VA announced a series of
immediate actions to improve the timeliness
of payments to community providers. These
improvements will be important to watch for
home care cooperatives serving or interested
in serving VA clients.
Finally, many states and some large cities also
have non-Medicaid funded public programs to
support home care client needs; many focus
on low-income individuals who do not quality
for other public pay programs like Medicaid.
Funds are allocated from a variety of sources
including state lottery, grants, and donations,
and funds are typically channeled through
existing community-based senior support
services, such as the Area Agencies on Aging,
who then contract with individual providers.
Rates vary widely as well but are typically low.
Page 7
Private Pay
While out of pocket dollars currently represent
less than 10% of the overall market, private pay
rates are the highest in the industry. Additionally,
there are significantly fewer regulatory and
administrative barriers to home care agencies
entering the private pay market. As a result,
competition for private pay clients is very high,
and new agencies are entering the market at a
rapid rate. Despite stiff competition, the higher
reimbursement rates and lower barriers to entry
in the private pay market have proved more
workable for start-up home care cooperatives,
and this has been the strategy pursued by the
last seven home care cooperatives that have
launched in the U.S. As cooperative agencies grow
and become better established, however, a more
diversified revenue stream offers more business
stability and long-term growth opportunity.
Average Public and
Private Pay Rates
Nationally, the median hourly payment rates for
private pay home care in 2017 were $27.50 per
hour for 1-2 hours of care, $23.50 for 3-5 hours
of care, $23 for 6-11 hours of care, and $22 for
6+ hours of care. Rates vary widely across the
50 states, however, with average rates as low
as $15 and $15.25 per hour in Louisiana (for
personal care and home health respectively)
and as high as $27.96 per hour for both personal
care and home health care in North Dakota. In
contrast, among publicly funded programs, the
average rate nationally for non-medical home
care was $19.01 per hour in 2016. Out of this
rate, agencies must pay all direct staff expenses
as well as overhead and administration. See
Appendix C for a detailed discussion of public
pay rates and opportunities.
Private Pay Home Care Rates
1-2 Hours $27.50
3-5 Hours $23.50
6-11 Hours $23.00
12+ Hours $22.00
Underwriting Home Care Cooperatives
Business Lines and
Diversification Opportunities
Today, most home care cooperatives focus
on non-medical personal and household care
(bathing, dressing, meal preparation, grocery
shopping, bill management, etc.). A few have
added more complex home health tasks to
diversify revenue streams or capitalize on
opportunities that arose through important
partnerships in their local markets. This strategy
is particularly sound for agencies serving public
pay markets. The additional costs of employing
and training home health aides and a registered
nurse to oversee enhanced services, however,
is only practical for agencies that have reached
a minimum revenue threshold of approximately
$1.5 million and can successfully absorb the
increased administrative costs. While most
home care cooperatives operating in the U.S.
today have not reached this threshold, it might
be an appropriate future goal for a growing
enterprise to aspire to. The addition of other
complementary business lines such as case
management and durable medical equipment
also hold promise for established cooperatives
that reach larger scale. Research by industry
experts is under way to support home care
cooperatives in exploring more novel revenue
diversification strategies.
Page 8
 Credit Quality Metrics

From a lender perspective, underwriting (including cooperatives) face and focus on

cooperatively owned enterprises involves the
same steps as underwriting a similar business
with a conventional ownership structure, with
the addition of a few more questions designed
to uncover the strengths or weaknesses of the
cooperative structure itself. Understanding
the structure of the cooperative – who are
its members, what are the obligations of
membership, how are profit or other benefits
allocated, how is leadership selected and
transferred, etc. are all important indications of
the strength of the operation and how likely it
is to be successful over time.
Generations of lenders have relied on the “5
Cs of credit”—Character, Capacity, Capital,
Collateral, and Conditions—to assess business’
credit worthiness. It remains as useful an
arrangement as any to methodically address
the key risk factors that small businesses
the elements that differentiate successful
borrowers from less successful ones.
Worker-owned cooperatives are businesses just like
any other, so in many ways underwriting them is
the same as underwriting a similar business formed
under a partnership, limited liability company, or
sole proprietor ownership status. From a financial
perspective, a “good” cooperative will look much like
other “good” privately held companies of the same
size in the same industry—it will have sales, cash
flow, assets, etc. that can all be analyzed just like any
other business. The unique elements of a cooperative
are to be found in its broad ownership base,
democratic governance structure, and its organizing
principle to benefit members and the community,
rather than necessarily pursuing the highest profit
margin. Understanding how each of these elements
work for the cooperative under consideration will
help in assessing the strength of the enterprise.

Traditional Additional
The Five Cs
Business Metrics Cooperative Metrics

Strong governance
Credit score
Perpetual by design & practice
Character Reputation
Reputation
Relationship
Relationships
External technical assistance

Cashflow
Historical financials
Patronage
Capacity Projections
Low turnover rate
Debt coverage ratios
Low turnover rate

Equity from family, First equity from members (not sufficient)

Capital
friends, & founder Grants and social impact investments

No personal guarantee options. Alternatives:

Collateral Personal Guarantees 1. Signed Contracts
Cosigners 2. Accounts Receivable
3. Cash on hand

Preparation/insulation Preparation/insulation from regulatory risk

from regulatory risk Caregiver recruitment and retention
Conditions
Caregiver recruitment (better than industry)
and retention Access to technical assistance support

Underwriting Home Care Cooperatives Page 9

Character
For a loan to an individual entrepreneur or
partnership, the “character” assessment for
some lenders is as simple as looking at a
credit score. Other lenders might consider
additional indicators of trustworthiness or
dependability such as market reputation or
relationships with customers or suppliers.
Since a co-op is made up of many individual
owners who may change over time, how
does a lender assess character?
For a cooperative, part of the answer will be
like other businesses: what is the reputation
of the organization? Are customers happy?
Prospective cooperative borrowers should
also be able to demonstrate history of
paying vendors and other obligations on
time. For a cooperative, however, a different
aspect of the “character” question will also
be an assessment of the strength of the
common institution that the members have
built. Management and leadership are as
important for cooperatives as for any other
organization, but a strong cooperative
also has an identity that is separate and
distinct from that of its individual leaders.
A cooperative’s governance must be
democratic, and it also must be perpetual by
both design and practice. A cooperative with
a strong “character” will be one that has clear
and complete organizational documents, a
well-ordered way for new members to join
the cooperative and departing members to
leave, thoughtful and well-written statements
of mission and purpose, and a history of
membership engagement, including regular
communications with members and a well-
planned annual meeting.
Capacity
Capacity, or cash flow, is essentially the
ability of a business to generate more cash
on a regular basis than it needs to pay its
debt obligations. Historical sales, market
data, as well as projected fixed and variable
operating expenses will inform analysis for
a cooperative in the same way they would
6
In cooperatives, members typically make a one-time purchase of a membership share to join the cooperative and become
a co-owner. This share is considered a member’s equity in the business entity. Membership shares can be nominal or
significant depending on the enterprise. In home care cooperatives the average membership share is $100, an investment
that is significant for a low-wage home care worker but also not a barrier to entry. Typically, home care cooperatives will
offer both the option to pay the membership share in one lump sum or use payroll deductions for a short time.
Underwriting Home Care Cooperatives
for any similar business. Key elements for a
cooperative will also include the degree to
which the cooperatives’ membership can reduce
turnover costs and/or impact sales, the way that
surplus or profit is returned to members, and
how member’s equity structure affects cash flow.
In a cooperative enterprise, cash flow is directly
affected by the way in which surpluses, or profits,
are passed on to members, as well as how
members’ equity shares are purchased when
new members join and redeemed when they
leave. Most cooperatives distribute profits or
“patronage,” as it is known, at the end of a fiscal
year, after all other financial obligations (including
loan payments) have been taken care of; some
also award quarterly bonuses based on profit.
Worker cooperatives have the advantage of the
prospect of new capital regularly invested by new
members (membership share), but also must plan
for how to cash members out when they leave
the cooperative.6 For most worker-owned home
care cooperatives, these amounts are modest
and are not a significant cash flow issue. Even
so, as lenders, it is prudent to require that the
cooperative demonstrate the ability to meet all
obligations to outside lenders before equity can
be taken out by departing members. For a more
detailed explanation of patronage allocation and
industry best practices, see Appendix D.
Capital
Lenders, of course, also look to a company’s
balance sheet for additional security that a
loan can be paid and to make sure that the
owner(s) are sufficiently invested in the project
and not over relying on outside debt to finance
the business. For most small businesses, initial
capital will come from the entrepreneur and
perhaps family and friends. For cooperatives,
the first equity capital should come from the
cooperatives members.
For worker-owned home care cooperatives
serving a primarily low-income workforce,
however, member investment will seldom be
sufficient to finance the costs of starting or
expanding their businesses. This does not
mean that the cooperative should not require
Page 10
a capital investment from members—it should.
But it is also important to be realistic about
expectations. For a home care worker making
$10-$12 per hour, for example, an investment of
$200 to become a cooperative member/owner
likely represents a significant sum. It may not be
sufficient for the business start up (which is one
function of member equity in a cooperative),
but it can certainly act as an indicator of a
member’s level of seriousness about his or her
commitment to the venture, which is another
function of member equity. Finally, as a venture
with social benefits for the broader community,
some cooperatives have been successful in
attracting grants or social investments from
local individuals and institutions. These can also
act as “quasi-equity” for the business.
Collateral
As a human service industry, the home care
sector is a challenging one to finance in general
because of the high need for working capital
relative to the scant base of equipment and
other tangible property available to secure a
loan. In such situations, in lieu of more tangible
assets, most small business lenders routinely
require personal guarantees as part of the
collateral for any loan to a sole proprietorship
or partnership. For a cooperative, however,
this can be problematic. Not only would it be
cumbersome to secure signed guarantees
from potentially dozens of members, but
members may also understandably be reluctant
to guarantee 100% of a loan when they don’t
control 100% of the enterprise, and, in fact, get
only a single vote for the board of directors. Such
a practice puts an unfair burden on co-op leaders
(at a time when good organizational leaders
should be encouraged, not penalized), and such
requirements have proved to be a “deal-breaker”
in most, if not all, situations where this occurred.
Considering also that the actual collateral value
of personal guarantees from a group of very
low-wage workers is likely not material, it is
in many ways more sensible to dispense with
personal guarantees entirely for worker-owned
home care cooperatives, as many lenders do
for nonprofit organizations. Instead, an analyst
could focus on other indicators of security such
as historical sales, reputation with key customers,
signed contracts in place, tangible property
combined with a discounted assessment
of accounts receivable, and perhaps asking
Underwriting Home Care Cooperatives
cooperative members for their ideas of other
ways that they believe they can demonstrate
their dependability and good character as an
institution. A committed lender could also work
with a cooperative customer over time to build
up a base of cash savings as collateral to support
future loans.
Conditions
The environment affecting home care enterprises
in general can be challenging. Wages are low,
employee turnover high, and many of the key
conditions of both the public and private pay
market are determined by factors outside of an
individual home care agency’s (cooperative or
not) ability to influence, let alone control. On the
positive side, demand for home care services is
strong and growing, and worker-owned home
care cooperatives have a distinct advantage over
their competitors, given their ability to positively
influence both employee retention and quality
of care through a concerted effort to engage
their member/owners. The degree to which a
cooperative makes use of the strength of its
membership is an important indicator of its ability
to influence the environment in which they work.
U.S. home care cooperatives also frequently
have access to a range of cooperative-specific
technical assistance resources to assist
members with tasks such as financial analysis,
strategic planning, and governance; taking
advantage of these opportunities is another
important way that cooperatives can positively
affect their environment. Several experienced
nonprofit lenders interviewed indicated that
the quality of the technical assistance that a
cooperative had access to was a significant
factor in its overall risk analysis.
For example, the Northwest Cooperative
Development Center has had a significant
role in both start-up and ongoing technical
assistance for the three home care cooperatives
located in Washington. The ICA Group provides
ongoing business consulting to several home
care cooperatives as well. Nationally, technical
assistance providers, consultants, existing home
care cooperatives, and other organizations
have been working together to build and share
resources for home care cooperatives through
monthly calls, meetings, and a yearly conference
dedicated to home care cooperatives.
Page 11
 Debt and Capital Needs
The financing needs of home care cooperatives,
like other small businesses, differ based on
their stage of growth as well as the primary
market (public vs. private pay clients) served.
Start Up
Funds for start-up operations are usually the
first financing need of a new worker-owned
home care cooperative and the most “terrifying”
ask for a lender, to quote one interviewed
for this guide. Start-up funding needs vary
significantly based on the target market to be
served but would typically include the costs for
office set-up, any computer, telephone, software,
or other technology needs, initial marketing and
outreach costs (including website and collateral
design and set-up), and ideally several months
of management salaries and other operating
expenses in reserve to cover the ramp-up period
and make payroll during the period between
when services are delivered and payment is
Sources
Start-up Loan $51,543
Paid in Capital $1,000
Total $52,543
* Amount needed to finance
operations pre-revenue
^ Two weeks of caregivers wages at 1,800
hours per month (21 clients X 20 hours
of billable hours per week per client)
Underwriting Home Care Cooperatives
received. For the private pay market, payment
may be made within a week or two of service
(thus lowering the need for working capital);
for the public pay market, depending on the
vendor, the time period could be weeks or even
months. We estimate that for a typical small
private pay cooperative start-up funding of
approximately $50,000 is necessary to launch
the cooperative.
The highly intangible nature of most of these
items makes start-up financing one of the
biggest barriers to the growth of more worker-
owned cooperatives, particularly those like home
care cooperatives which employ primarily low-
wage workers. Surveyed cooperatives made use
of a variety of alternative financing for start up,
including local banks, CDFIs, social investors,
and foundations. Traditional lenders can certainly
have a role in the successful start up of a home
care cooperative; working in collaboration with
other locally-based organizations or nonprofits is
a good place to start.
Uses
Pre Start-up Expenses $11,255
• 4 Months Part-time Admin ($6,250)
• Marketing Expenses ($3,005)
• Office Rent ($2,000)
Working Capital* $27,893
Payroll Buffer^ $13,395
Total $52,543
Page 12

Cooperative Spotlight:
Unique Strategies for
Start-up Funding
Peninsula Homecare Cooperative
in Port Townsend, Washington,
got started with the help of a
local investment club. Community
members made low-interest, flexible
loans to help launch the new
cooperative. The venture has been
successful, and all investors were
paid back early.
Cooperative Care of Wautoma,
Wisconsin, accessed financing from
a community bank on the strength
of an 18-month contract with their
local county. They have since scaled
significantly, bringing on numerous
state and county contracts as well as
VA and private pay clients.
Both Cooperative Home Care
Associates (CHCA) in the Bronx
and Home Care Associates (HCA)
in Philadelphia launched with
significant grant funding through
a nonprofit partner, focused on
the development and delivery of
high-quality training to caregivers.
Overhead for the training program
was leveraged early on to offset
overhead costs for the cooperative.
CHCA and HCA are the two
largest worker-owned home care
cooperatives in the country.
*See Appendix E for detailed start-up
case studies on Peninsula Homecare
Cooperative and Cooperative Home
Care Associates
Underwriting Home Care Cooperatives
Operations/Cash Flow/
Working Capital
One issue that every enterprise working in the
home care sector must address is the need
for working capital. The primary expense of
these businesses is labor, and payroll must
be met weekly or bi-weekly, even as some
public-sector payers take 4-6 weeks or more
to pay invoices. This situation means every
business operating in this industry has a more
or less permanent need for working capital.
In addition, several necessary large annual
expenses such as workers’ compensation
insurance premiums or financial audits required
by public sector payers are often billed in lump
sum amounts that may or may not correspond
to the cooperative’s annual cash flow, causing
additional cash flow concerns.
For a low-margin business such as home care,
unanticipated fluctuations in such working
capital demands—even if such changes
are not indicative of a serious flaw in the
underlying business model—can be potentially
catastrophic. Cooperative agency surveys
uncovered several examples of unexpected
changes in public sector payment policies
or other events outside of the cooperative’s
control that led to alarming cash flow situations
for the enterprise. One answer to such market
conditions would surely be for the cooperative
to keep additional cash reserves on hand.
While this is an admirable long-term financial
goal, this might not always be possible for a
business owned by low-wage workers. Another
good alternative is to have a trusted lender
who understands the cooperative’s market
and needs and who is willing to assist them in
smoothing out monthly and annual cash flow
demands. Access to a stable and sufficient line
of credit is an important part of the financial
picture for any co-op in this industry. This
should be coupled with monitoring of the
cooperatives accounts receivable indicators,
with appropriate coaching as needed.
Lack of access to an appropriate line of
credit for operating needs, a weak collections
system, and/or lack of overall planning on the
cooperatives’ part have led some cooperatives
to need a cash infusion structured as a
working capital term loan. While the decision
to finance working capital in the form of a
term loan structure is not ideal, such loans
have helped more than one home care
Page 13
cooperative navigate challenging financial
situations and move ahead in a stable and
profitable way. The willingness on the part
of a lender to look beyond the short-term
cash flow predicament and focus on the
long-term prospects of an enterprise are
key, and in some cases a term loan may be
the best answer.
A final operating need of most small
businesses is access to a company credit
card. For worker-owned cooperatives,
these can be surprisingly difficult to obtain.
Many lenders ask cooperative leaders
to personally sign for a company-based
card, the way they would if the business
was solely their own. Having to personally
guarantee a company credit card thus
places board members or managers in
a very awkward position. Having staff
members routinely use personal credit
cards for work purchases is also not a
desirable alternative from a “best practices”
audit perspective. A better alternative
would be for banks or credit unions to treat
worker-owned cooperatives similarly to
nonprofits, and issue company cards based
on the strength of the underlying banking
and deposit relationship alone, monitoring
as appropriate.
Underwriting Home Care Cooperatives
Expansion
Once started, many successful cooperatives
will encounter the opportunity to expand their
service area and perhaps their menu of services.
Assuming a well-thought-out strategy, this is to
be encouraged, as there are some modest but
meaningful economies of scale to be accessed
through a larger, more robust organization,
particularly in terms of management expertise.
Costs that may need to be included in expansion
financing include software needed to work with
a new base of customers, marketing materials
and advertising, training, and additional working
capital to carry the “float” between service
and payment for more employees, as well as
to invest in hiring a sufficient number of new
caregivers. For a lender, it is important to review
the plans for accessing new customers but also
new workers and readiness of the management
team to take on the challenges. Items that are
typically underestimated in expansion planning
include the need for more permanent working
capital, delays that may be encountered in
recruiting workers in an unfamiliar labor market,
as well as the cost-benefit analysis of labor-
saving technology such as specialized software
that may enable a cooperative to get paid much
more quickly from a publicly-funded source.
An experienced business lender can help and
support a worker-owned cooperative in making
smart plans for expansion.
Page 14
 Key Financing Opportunities
The challenges facing the home care industry
should not be underestimated, but there are also
numerous opportunities in this sector.
Increasing Demand
The need for home care services is growing--
significantly and steadily, in every market, all over
the country. This is a much-needed, if under-
valued service, and as such, there is significant
opportunity for a well-functioning enterprise with
strong local relationships to prosper. Additionally,
awareness of the importance (and financial value)
of home care services in the healthcare continuum
is growing at a rapid rate. New models of client-
centered and value-driven care will only increase
home care’s position in the market.
Cooperative Advantage
While far from a guarantee of success, the worker-
owned model has much to contribute to the future of
the industry. Worker recruitment and retention are the
biggest challenges faced by home care agencies. What
data there is on the small group of existing worker-
owned home care cooperatives show that worker
ownership is truly meaningful to home care workers and
results in lower turnover and greater job satisfaction.
Turnover in the wider industry is more than 67% per
year and increasing year over year, while home care
cooperatives have shown turnover at less than half that
rate. As the costs of staff turnover can be substantial
($2,200 per employee), this is an important point. A
related advantage is that worker ownership often leads
to higher quality care, as committed workers are given
an opportunity to influence care and decision making,
and experienced workers stay with the cooperative
for longer. Case study evidence has shown again and
again that when home care workers can influence key
decisions, they make decisions that result in higher
quality care and better outcomes for clients.
Conversions
While there are challenges to financing existing
and start-up cooperatives, there are opportunities
Underwriting Home Care Cooperatives
in converting existing home care agencies into
cooperatives. A national survey conducted by the ICA
Group in 2016 found that 33% of home care agency
owners expected to sell their businesses in the next
five years and 58% in the next 10 years. ICA research
further found that of the home care agencies that are
the ideal size for a cooperative conversion (20-100
employees), an average of 40 have sold or closed
each year since 2000 (more than 700 potential
opportunities). Additional research conducted by the
ICA Group into the financial feasibility of home care
conversion can be accessed upon request.
Potential Conversions (2000-2013)
64
60
55 57 57
43
39 36
32
21 32
16
19
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Franchise Model
Recently, franchises have experienced significant
growth and investment in the home care industry
and there has been discussion as to whether a
cooperative franchise may be a model to scale home
care cooperatives. The benefits of a franchise would
include shared branding, start-up materials, and
ongoing management resources. Previous research
by The ICA Group determined that the legal structure
of a franchise is not well-suited to the home care
cooperative model. However, a shared infrastructure of
management and marketing supports for existing and
future home care cooperatives would unquestionably
lead to financially stronger cooperative businesses,
improving their ability to service debt. The Cooperative
Development Foundation, The ICA Group, Capital
Impact Partners, existing home care cooperatives,
and other cooperative development and technical
assistance partners are building the foundation of
such a network that will lead to a stronger home care
cooperative ecosystem.
Page 15
 Lender Recommendations

Lenders wishing to engage in this sector can
offer both capital and business supports to help
grow this important sector. The following is a
summary of recommendations presented in this
guide to assist lenders interested in supporting
home care cooperatives.
For additional insight into the home care
cooperative sector, please visit
www.seniors.coop or contact Capital Impact
Partners and The ICA Group directly.

 Rely on public contracts, government

receivables and/or a history of effective
collections to collateralize a loan in lieu of
personal guarantees.

 Work with cooperatives over time on a plan

to build up internal cash reserves to facilitate
future borrowing. 703.647.2352
www.capitalimpact.org
 Treat cooperative boards the way your
institution would treat nonprofit boards,
that is, volunteers engaged in service to a
socially-useful purpose, and limit personal
exposure entirely based on that reasoning.

 Consider instituting credit checks on card

signers in lieu of actual personal guarantees
ICA GROUP
for a company credit card. This way, the
lender can maintain some control over
exposure without subjecting individual co-op 617.232.8765
members to personal financial liability. www.ica-group.org

 Differentiate in loan analysis between cash

flow issues that are caused by external
constraints (changes in public policy, payment
timelines, insurance billing cycles, etc.) versus
issues that indicate actual and on-going
structural weaknesses in business operations.

 Assist borrowers in assessing and potentially

investing in systems to streamline bottlenecks,
including software and equipment to make
billing or scheduling easier.

 Help cooperatives to anticipate future

issues or opportunities by asking members
thoughtful questions about their markets
and future plans; prompting dialogue and
encouraging cooperative leaders to build
their business acumen.

Underwriting Home Care Cooperatives Page 16

 Appendices

Of course, the devil is in the details, and for

Appendix A: Democratic
Governance Overview
A properly functioning cooperative governance
system clearly articulates the roles of the
members, the Board of Directors (including a
“grievance council”), and the management. If
the governance system is to function well, the
responsibilities of these groups must be clear,
and the groups must have real decision-making
power. While each co-op and its culture are
unique, generally the roles of each of these
groups fall into this general form:
The Membership: The members, or
shareholders, are responsible for all
corporate matters and significant
policy matters. Additionally, the by-
laws can specify issues that should
be addressed by the membership as
a whole.
The Board of Directors:
The Board is responsible for all policy
and governance matters not handled
by the Membership. Specifically,
they select key managers, approve
the budget, and set the strategic
direction of the firm. Home care
cooperative boards can include
caregiver members and external
stakeholders, where beneficial.
Members should make up the
majority.
each issue that comes up determining whether
it’s an appropriate issue for the membership to
consider, the board to decide, or management
to handle can be a challenge. Regular training
on decision-making processes and power
within a cooperative is advised.
Having a capable manager or managers
and a strong, engaged board are critical
to the long-term success of a cooperative.
Management must be accountable to the
board, and the board must be empowered to
oversee management. Key elements of a well-
functioning system include:
• Clear systems and processes for
communication and information sharing
between the management and the board, the
board and membership, and management
and membership
• A predictable and regular schedule of board
meetings and member meetings
• A process for addressing grievances
• Regular training on board, membership, and
management functions. Board training is
best done by external parties.
See: The ICA Group’s “Democratic Governance –
An Overview” for additional detail.
http://ica-group.org/democratic-governance/

Management: Management is
responsible for carrying out
the regular business of the firm
including marketing and sales;
financial management (although
some cooperatives do also employ
outside accountants); HR functions,
including staff supervision; and
scheduling and other typical
functions. Management has
influence and will often generate
or review policy proposals for the
board and membership, but they do
not have the authority as managers
to set policy.

Underwriting Home Care Cooperatives Page 17

 Appendix B: Map of Operational U.S Home Care Cooperatives
Circle of Life Caregiver Cooperative
Peninsula Homecare Cooperative
Capital Homecare Cooperative
Courage Home Care
Heart is Home Cooperative Care
Kilohana Angels
eQuality HomeCare
Appendix C: Public
Pay Overview
Medicaid Overview
Dually funded by the federal government and
individual states, Medicaid provides financial
support for health care services for low-income
individuals, including elderly and disabled
individuals requiring long term care (accounting
for over 60% of Medicaid spending). Under
Medicaid, the federal government provides a
base match of 50% for approved Medicaid-
provided services, with low-income states eligible
for higher reimbursement rates. To be eligible
for Medicaid benefits, individuals must meet
federally mandated financial and asset criteria.
Beginning in 2014, the Affordable Care Act
allowed states the option to expand Medicaid
7
Families USA. “A 50-State Look at Medicaid Expansion.” https://familiesusa.org (accessed November 2018).
8
Congressional Budget Office. “An Overview of the Medicaid Program (2013).” https://www.cbo.gov/publication/44588
(accessed November 2018).
Underwriting Home Care Cooperatives
Cooperative Care
Coopertive Home
Care Associates
Home Care Associates
Golden Steps Elder
Care Cooperative
Everyday Details
eligibility to all non-elderly adults with income
below 138% of the federal poverty line. Under
“Medicaid Expansion,” the federal government
absorbs a larger share of Medicaid costs for new
enrollees, covering 100% of costs from 2014 to
2017 and gradually reducing that percentage to
90% from 2017 to 2020. To date, 32 states and the
District of Columbia have expanded Medicaid.7
Medicaid requires that states provide specific
services at a minimum to participate in the
program. Required programs include inpatient
and outpatient hospital services, physician and
laboratory services, nursing home care, and,
more recently, home health care. Above the
minimum required programs, states may elect to
cover additional services and/or expand services
to individuals outside of the standard eligibility
limits set by the Center for Medicaid and
Medicare Services (CMS), the federal governing
body. Typically, these additional services are
provided under approved “waivers.”8
Page 18
The number and type of waivers in each state
varies widely, however, common waivers include
the 1915 Home and Community Based (HCBS)
waivers. Aged and Disabled Waivers (ADW), and
Intellectual Disability Waivers (ID). Home care
relevant 1915 waivers include:
 1915(c) Home and Community-Based Waivers
(offered in 47 states and DC)
 1915(i) State Plan Home and Community
Based Waivers
 1915(j) Self-Directed Personal Assistance
Services Under State Plan Waivers
 1915(k) Community First Choice Waivers9
1915 (c) HCBS waivers were first introduced
in 1983 as a way for states to transition
beneficiaries out of costly institutional care
settings, and in 2005, became formal Medicaid
State plan options.10 States can offer as many
1915(c) Home and Community-Based Waivers
as they elect, provided that they meet the
requirements set forth by CMS, and can elect
what services to cover under the waivers,
however, home health aide, personal care aide;
and homemaker services are almost always
covered under these programs.11
From Medicaid’s founding in 1965 until the
early 1990s, Medicaid operated under a system
of “fee-for-service,” where providers were
directly reimbursed for services provided, based
on rates set by individual states. In the early
1990s however, Medicaid began a transition
towards a system known as “managed care” to
better manage costs, utilization, and quality.
Under Medicaid managed care, state Medicaid
agencies contract with independent for profit or
nonprofit Managed Care Organizations (MCOs)
that accept per member per month payments
for health care services, known as “capitated
payments.” Because payments are “capitated”
MCOs are driven to balance the needs of high-
need/high-cost beneficiaries with low-need/
low-cost beneficiaries and provide care in the
most cost-effective manner possible to avoid
cost overruns. Early on, managed care was
implemented under 1115 Waivers, but in 1997 the
Balanced Budget Act gave states more authority
to implement managed care programs without
waivers.12 As of March 2017, only 12 states did
not have Managed Care programs in place.13
States that have begun transitions to managed
care programs are in varying states of transition.
Several states including Tennessee, Hawaii, New
Hampshire, New Jersey, Rhode Island, Kentucky,
Iowa, Delaware, Florida, and Arizona, operate
almost exclusively under managed care programs
(over 90% transitioned), including home and
community-based services, while others are just
beginning this transition.14 Understanding where
specific states fall on this transition is important,
as it is directly correlated to how service rates
are set, how money flows, and the importance of
strategic partnerships, scale, and other factors to
home care agency success in a state.
In addition to the transition to managed care,
states are increasingly transitioning Medicaid
to “value-based” care models by implementing
Accountable Care Organizations (ACOs).
Dozens of states have implemented ACO
programs and the model is expanding rapidly.15
The goal of ACOs is to “(1) enhance the patient
experience of care; (2) improve the health of
the population; and (3) reduce the per capita
cost of health care.” What differentiates an
ACO from an MCO are innovative values-based
payment structures and carefully defined and
tracked data and quality metrics to assess
and confirm established value outcomes. The
transition to value-based care via the ACO
model is an important one for cooperative
home care agencies and developers to
watch, as higher quality care is a hallmark of
cooperative home care agencies and could be
an important market differentiator.16
Capitated versus
Fee-For Service Medicaid
In an increasing majority of states, publicly-
supported, long-term, in-home supports are
managed by state-contracted MCOs. MCOs
typically receive capitated reimbursement rates
from the state and then negotiate individual,

The Center for Medicaid and CHIP Services. https://www.medicaid.gov/index.html (accessed November 2018).
9, 10, 11

12
Henry J. Kaiser Family Foundation. “Five Key Questions and Answers About Section 1115 Medicaid Demonstration
Waivers.” https://kaiserfamilyfoundation.files.wordpress.com/2013/01/8196.pdf (accessed November 2018).
13
Henry J. Kaiser Family Foundation. “Total MCO’s (2017).” https://www.kff.org/ (accessed November 2018).
14
Henry J. Kaiser Family Foundation. “Share of Medicaid Population Covered Under Different Delivery Models (2016).”
https://www.kff.org/ (accessed November 2018).
15
Center for Health Strategy, Inc. “Medicaid ACO’s: Status Update (2017).” www.chcs.org (accessed November 2018).
16
Center for Health Strategy, Inc. “Medicaid Accountable Care Organization Programs: State Profiles Brief (2015).
www.chcs.org (accessed November 2018).

Underwriting Home Care Cooperatives Page 19

private contracts with home care providers.
In capitation models, MCOs are paid a set
amount per member per month for long-term
services and supports by the state, based on
an expectation of needs. Capitation payment
models are thought to encourage preventative
care and efficiency. Under managed care models,
home care agencies (including cooperatives)
can negotiate agency contracts with their area
MCOs, potentially securing higher rates for quality
care. When financing a cooperative home care
agency that is licensed to serve public pay clients,
a demonstrated history of negotiating higher
reimbursement rates may be an important factor
to consider.
The more traditional model of reimbursement
is Fee-For-Service (FFS), which is still in place
in many states. In FFS systems, state Medicaid
offices pay providers based on actual hours of
service provided to a patient. Reimbursement
rates are typically higher in FFS states due to
fewer regulatory barriers and administrative
overhead; however, there is also more
competition. Another difference is that FFS
systems do not place as much value on the
quality-of-care provider, which is a differentiating
factor for home care cooperatives.
As one business, it is not possible for a home
care cooperative to affect the public payment
system in place in any state. What home care
cooperatives can influence, and what a lender
should look for, is the way in which cooperative
use their advantages in staff retention and
quality of care to influence the stability and
profitability of their enterprise.
Medicare
Historically, Medicare reimbursed home health
care only and only in cases where a Medicare
recipient’s doctor ordered home health services
to help the recipient recover from an injury or
condition that did not require hospitalization.
Personal care services were not eligible for
reimbursement, and services could only be
utilized for a maximum of 21 days, for less than
7 days per week, and less than 8 hours per day.
Typically, agencies servicing Medicare clients
will be required to offer a full range of Medicare-
eligible services, and only Medicare recipients
that require skilled level nursing will be eligible
(and only in some cases) for the much higher-
paying and complex home care support services.
17
Willink, Amber, Ph.D and DuGoff, Eva H, Ph.D. “Integrating Medical and Nonmedical Services - The Promise and Pitfalls of the CHRONIC
Care Act.” The New England Journal of Medicine. https://www.nejm.org/doi/full/10.1056/NEJMp1803292 (accessed November 2018).
Underwriting Home Care Cooperatives
As a result, only large and/or diversified home
care agencies that can offer a full range of
eligible services will typically work with Medicare.
As of the writing of this guide, no cooperatively
owned home care agency offers Medicare
services, and addition of Medicare clientele will
remain out of reach for most home care agencies
(cooperative or otherwise) for some time.
Changes made as part of the Creating High-
Quality Results and Outcomes Necessary to
Improve Chronic (CHRONIC) Care Act, as
part of the Bipartisan Budget Act of 2018, are
beginning to change the Medicare long-term care
marketplace, however. Specifically, changes in the
CHRONIC Care Act will allow Medicare Advantage
plans to offer nonmedical supplementary benefits
to beneficiaries with chronic illnesses that have
“a reasonable expectation of improving or
maintaining the health or overall function of the
chronically ill enrollee and may not be limited
to being primarily health related benefits”,
and eliminate the mandate to provide uniform
benefits allowing plans to tailor their benefits
to specific needs of chronically ill clients.
Guidance by CMS have stated that plans can take
advantage of these changes as early as 2018, but
it is unlikely plans will pursue programs before
2019 and likely 2020.17
Appendix D: Patronage
Allocation—A Primer
Ownership structure is the basic building block
of any enterprise. It determines how authority,
responsibilities, risks, and rewards are distributed
in a firm. It also determines how an owner
enters and leaves a company. In a worker co-op,
ownership and control of the business derive
from working in the company, rather than from
simply investing capital in it. A central element
of this business structure is that labor employs
capital, rather than capital employing labor. In
this way, worker co-ops are structured to provide
a stable source of profitable work for the worker-
owners instead of a profitable investment for the
shareholder-owners.
In a conventional corporation, dividends are
distributed according to each shareholder’s
capital investment and number of shares,
so they are called “capital dividends.” In a
cooperative, dividends are allocated according
Page 20
to contributed labor or “patronage,” so they are
called “patronage dividends.” Under Subchapter
T, earnings allocated to members on the basis
of labor patronage can be in the form of cash
or written notices of allocation and may not be
declared as non-member or unrelated business
income. Importantly, a cooperative corporation
may allocate a patronage dividend partially or
entirely on paper and retain the profits for a
period of time to use for any corporate purposes.
In a worker cooperative, it is best practice to
manage and distribute member patronage
dividends through a system of Internal Capital
Accounts (ICAs). In an internal capital account
cooperative, the entire net book value of the
cooperative is reflected in internal capital
accounts, one for each member, and a collective
account. Each member’s internal capital
account records the part of the net book value
ultimately to be returned to each member. An
individual account consists of a membership fee
(contributed capital/equity) and written notices
of allocation (retained earnings).
Cooperatives also have a third option when
deciding what to do with surplus funds,
that of making allocated but nonqualified
distributions. In this case, surplus funds are
allocated to co-op members rather than the
cooperative collectively but are not (yet)
distributed to individual member accounts.
Such funds act essentially as a collective
account, yet the co-op retains the records
and the option to distribute these funds to
individual member accounts later, based on
patronage earned at the time.
When setting a patronage allocation strategy,
there are three competing goals that a
cooperative must balance:
1. Sustainable Business Growth: By maximizing
the firm’s collective retained earnings (in
the collective account), the cooperative will
likely have a higher tax obligation, and, thus,
less funds to re-invest in growth. However,
funds the cooperative retains can be
reinvested in growth or to cover unexpected
future expenses without needing to seek
outside financing.
2. Long-Term Member Wealth: By maximizing
the cooperative’s Written Notices of
Allocation (WNAs), which are temporarily
reinvested in the business free of corporate
income tax, these additional funds can then
Underwriting Home Care Cooperatives
be used to fuel greater growth than if the
cooperative simply retained the earnings
collectively. However, while WNAs shield
the business from corporate tax, they
do require that individual members
pay income tax on the entire dividend
amount, whether it is paid out in cash
or retained as equity in the business.
The amount retained will also eventually
need to be paid out to members, and
this creates a cash flow obligation that
could negatively impact the cooperative’s
growth in the future. Further, there is
the inherent risk that the position of
the business will change over time and
allocation of losses to individual accounts
will decrease their value. Depending on
the needs of the business and the needs
of the cooperatives’ workers, these pros/
cons need to be carefully weighed.
3. Regular Cash Payouts: By maximizing
the cash paid out to members, the
cooperative increases member income
in the short term. However, the cash that
the cooperative pays out as patronage
dividends cannot be used by the firm to
fuel growth or increase productivity, which
could negatively impact the firm’s growth
potential. It should be noted that federal
law requires that any WNA must be paid
out at least 20% in cash to help members
cover the tax liability they will incur.
The other key consideration is how long
the co-op will retain written notices of
allocation. The best way to think about
WNAs is that they are investments members
make in the future growth of the business.
Therefore, the longer the cooperative can
retain the funds (such as 15 years or even as
long as retirement), the greater impact this
investment can have on future growth. In
home care, the tenure of caregivers, even in a
cooperative, is shorter than other industries,
so this presents a complicating factor.
The split the cooperative chooses will
vary with the goals of the cooperative
and the related capital needs of the firm,
the needs of the firm’s employee-owners
(i.e. low-wage workers versus higher wage
workers), and the length of redemption
period for the notices of allocation. A
good starting point for determining the
split is 50-50, although ICA generally
Page 21
recommends that at a minimum, 30% of net
income is allocated to the collective account.
In a volatile and unpredictable industry such
as home care, it is wise to reserve some
funds to address future unknown expenses.
However, more frequent distribution of
patronage dividends to members may also
be wise, however, given the low-wage status
of most caregivers in the industry. A well-run
home care cooperative will have given its
allocation strategy thorough consideration.

Cooperative Net Profit Distribution

Cooperative Operations

Net Profit

Allocated Equity/
Dividends to Unallocated
Patronage Refund
Preferred Shareholder Equity
(credit to individual
(member or member account (not credited to
nonmember) based on patronage) individual member)

Qualified Nonqualified

Minimum Maximum Cash Deferred

20% cash 80% refund refund to refund to
refund to to member member member
member can be (no min/max (no min/max
required deferred requirements) requirements)

Equity Capital:
Reinvested
in Co-op

Both co-op Member Co-op pays tax. Upon future distribution Co-op
and recipient pays any to member, member pays any required pays
pay tax required tax tax, and co-op receives tax credit tax

Image credit: University of Wisconsin Center for Cooperatives

Underwriting Home Care Cooperatives Page 22


Appendix E: Home Care
Cooperative Case Studies:
A Tale of Two Start Ups
Peninsula Home Care, Port Townsend, WA:
A private pay model
The idea for Peninsula Home Care (PHC)
Cooperative came from a core group of
five workers who first heard of the idea of
a worker-owned home care cooperative
through a chance conversation with the
local food cooperative manager, who, in
turn, had heard of it through the local
cooperative development center, the
Northwest Cooperative Development Center
(NWCDC). Local home care workers knew
that something must be done to improve pay
and conditions, and the cooperative model
seemed to be just the thing. A call to NWCDC
confirmed their interest, and NWCDC quickly
sent an experienced cooperative developer,
Deborah Craig, to meet with the group and
discuss their situation. The fact that a similar
group of home care workers had successfully
formed their own worker-owned business less
than 100 miles away in nearby Bellingham,
Washington provided both inspiration and the
practical example of a peer organization.
NWCDC staff helped the group to figure out a
start-up budget including state licensing fees,
office rental, and a few months of payroll for
their initial administrative staff. At first, co-op
leaders approached their local credit union
with a loan request for $35,000 in working
capital start-up funds. When the loan officer
told them that all co-op members would
be required to guarantee the full loan, they
decided not to apply. Fortunately, about this
same time the group heard about LION, the
Local Investment Opportunity Network, a
club of Port Townsend area residents willing
to make loans to help local businesses grow.
PHC Board President, Kippi Waters, made a
presentation to the group. Recognizing the
importance of quality home care for the area’s
aging population, four LION members quickly
offered help. The group was able to raise their
entire start-up budget in a single evening, in
low interest (4-5%) notes, with interest-only
payments for the first 12-24 months.
Within 10 months of their first organizing
meeting in April of 2015, Peninsula Homecare
Cooperative was open for business. Four of
Underwriting Home Care Cooperatives
the five initial organizers became part of the
new co-op, joined by 10 more, with additional
members joining as the co-op slowly gained
momentum and added customers. Within the
first five months of operations the co-op had
achieved profitability. By the end of 18 months,
they had paid all of their LION lenders back.
First year 2016 revenues (10-month year) were
about $150,000. This figure grew almost four-
fold in their first full year of operations in 2017,
and by mid-year 2018, sales were showing
another 45% increase.
Technical assistance throughout the start-
up period was provided by the staff of the
Northwest Cooperative Development Center.
The co-op was also fortunate in that co-
founder and initial Board President, Kippi
Waters, had significant previous business
and communications experience, and all the
members were experienced caregivers. The
co-op was further aided in their smooth start
up by members who were willing and able to
move hours to the new business on a gradual
basis, keeping their old clients and agency
assignments until PHC could find them full-
time hours. Finally, the co-op was also helped
tremendously by a local community that was
attuned to the needs of their aging population
and willing to make an investment in helping
the new co-op to start up.
Cooperative Care, Wautoma, WI: A
cooperative serving the public pay market
Waushara County, WI, like many rural areas
in America, had lots of wide-open spaces,
few stoplights, and an increasingly elderly
population. Caring for elders presents a
particular challenge in sparsely-populated
communities, as clients live far from care
institutions, and caregivers spend many hours
on the road between client visits. Throughout
the 1990s, Waushara County muddled through
as best they could, providing a patchwork of
care drawing on the limited resources available
in the area. At the time, a State of Wisconsin
program called Community Options provided
in-home services to help keep seniors in
their own homes and out of nursing homes.
Waushara County used a system of independent
caregivers to accomplish this. County staff
kept a system of two recipe boxes: one filled
with index cards with the names of residents
needing care and the other with cards with
names of local Personal Care Workers and
Page 23
Certified Nursing Assistants available and
willing to provide basic home care services on
call. Workers were paid through a third-party
agency and were classified as independent
contractors working in the service of the
individual clients. Wages were low and benefits
nonexistent under this system, but it worked in
a rudimentary way, stretching resources as far
as possible. Even so, Lu Rowley, the Waushara
County director of human services at the time,
worried that instead of confronting the problem
of inadequate resources, the county was
inadvertently perpetuating it and adding to the
ranks of the county’s working poor rather than
trying to craft a more substantive solution.
This situation changed in the mid-1990s when
a care worker in a nearby county was injured in
a fall at a client’s home. The caregiver took the
county to court on a workers’ compensation
claim and prevailed. The court ruled that
despite the county’s attempt to distance
itself through the use of a third-party fiscal
intermediary, caregivers were effectively
acting as county employees and should be
treated as such. This created a substantial new
liability for the county involved and arguably
for other counties, like Waushara, that used a
similar payment scheme. The ruling reinforced
Rowley’s misgivings about the entire recipe
box system and cemented her resolve to find
a better alternative for providing home care
services for county residents.
Rowley had a different background than many
people who held her position in other counties,
one which would help her to become the
“godmother” of Cooperative Care. In addition
to being a social worker, she had taught social
work at the graduate level, traveled widely, and
had helped run several businesses. She thought
about systems from an integrated perspective
and was not afraid to try an entrepreneurial
approach. When Rowley heard about another
successful worker-owned cooperative
home care agency, Cooperative Home Care
Associates (CHCA) in the Bronx, New York, that
had successfully used the cooperative model
to improve job quality and worker retention
for home health workers in their market, she
wondered if the same strategy might work
in rural Wisconsin. To find out if such an idea
might work, Rowley applied for and received
a series of grants totaling $50,000 from the
Wisconsin Department of Health and Family
Services to explore creative ways to address
the recruitment and retention of long-term
Underwriting Home Care Cooperatives
care workers, including the cooperative option.
Social worker Diane Harrington was contracted
to conduct the study, and USDA staff member
Margaret Bau agreed to assist, providing key
education and technical assistance about
cooperatives.
In November 1999, Harrington and Bau met
with a group of caregivers who had been
providing services under the county’s former
payment model to get feedback on the idea of
forming a worker-owned cooperative. For many
of the caregivers who were working in isolation
at clients’ homes, the meeting was the first
time that they had gathered together with a
group of fellow caregivers. Bau and Harrington
presented the idea of organizing into a worker
cooperative and it resonated with many of
the caregivers. Eighteen of those assembled
volunteered to be part of a steering committee
to guide the project. This group met monthly
for the next 15 months as the feasibility study
and business plan evolved.
When an initial business plan developed
by a paid consultant proved useless, co-op
organizers took on the task of developing
the business plan themselves, with the
input of caregivers. Staff of CAP Services, a
local Community Action Agency, provided
key assistance in developing the financial
projections. The steering committee continued
to meet, drafting a mission statement and
discussing how patronage and other decisions
would be made in their co-op. Finally, the
product was ready to present to the potential
membership base for action.
On January 17, 2001, the group voted to
proceed and elected their first board. Donna
Tompkins, a caregiver with significant previous
community service experience, was selected as
the initial board president. Her quiet but strong
leadership would prove crucial to the success
of the new co-op in its early years. Cooperative
Care was officially incorporated the following
month with 63 initial members.
Key to the feasibility of the new venture was an
$850,000 contract the co-op received to provide
home and personal care services for Waushara
County. On the strength of this contract (and a
modest $4,000 in member equity), the co-op
was able to borrow $125,000 in working capital
from a local bank to begin operations. A retired
executive of the local electric co-op provided
essential advice and assistance in setting up
Page 24
administrative systems and hiring staff. The co-op
was fortunate that it did not have to expend time
and resources in recruiting direct care workers
to join the new agency. All 60+ members of the
co-op were rolled over from the previous recipe
box system to Cooperative Care over a six-
week period, effectively making the “start-up”
process much more like that of a conversion of
an existing agency. On June 1, 2001, Cooperative
Care opened for business.
Over the years, Cooperative Care’s fortunes
have ebbed and flowed, as the organization
successfully weathered the challenging
transition from an intimate, county-based care
system to a new, more competitive system of
reimbursement through a network of regional,
for-profit Managed Care Organizations (MCOs).
Today, the Co-op’s 37 caregivers serve a seven-
county area, an array of private as well as
public pay clientele, and are managed by a core
group of experienced member-owners.
Common themes and observations:
Both examples illustrate the importance of
community support to the successful start up of
a worker-owned home care agency. Peninsula
Homecare was able to rely on community
members for the entirety of their start-up funding,
while the Cooperative Care team’s personal
relationships with their community bank and
steadfast support from County officials ultimately
secured the financing they needed to launch.
At least one other start-up home care
cooperative received a working capital loan
from a CDFI to augment funds from a single
local investor, and yet another relied on
significant volunteer labor and funds from
family; at least two efforts also reportedly
tried crowd funding, with little success. In
addition, an earlier effort serving a different
rural Wisconsin market ultimately failed, in part
because state MCOs were not able or willing to
play the supportive role that Waushara County
had for their co-op. None of these approaches
ended up being able to provide the amount of
working capital that was actually needed. So,
while the stories of Peninsula Homecare and
Cooperative Care offer insight and guidance
into potential paths forward for new start-
up cooperatives, the role of more traditional
lenders for home care start-ups in areas where
other local financial support does not exist
should not be underestimated.
Underwriting Home Care Cooperatives
Appendix F: State-Based
Opportunities
In 2017, The ICA Group conducted an analysis
of the home care markets in seven states: North
Carolina, Minnesota, Pennsylvania, New York,
Texas, Washington, and New Mexico. A report
on the market opportunity in Wisconsin was
also written in 2016. Based on these analyses,
The ICA Group has developed a framework
around the regulatory environment, the
aging population, the labor market, and the
competitive environment to help determine
where the best locations are for home care
cooperative development. Not surprisingly,
states with existing home care cooperatives
such as Pennsylvania, New York, and
Washington rose to the top of the list.
Labor Competitive
Force Environment
Home Care
Opportunity
Home Regulation
Care Demand
In an industry where recruitment and retention
are such important factors for the success of
a home care business, the ratio of clients to
potential caregivers is an important metric.
Nationally, there are just over eight clients
for every one potential caregiver, but there is
wide variation across states. States such as
New York, Minnesota, and, to a lesser extent,
Pennsylvania are significantly below the
national average while many states in the south
have a significant undersupply of caregivers.
In states with a larger caregiving workforce
it will be easier and cheaper for home care
cooperatives to add caregivers to their staff
and to meet growth opportunities.
Page 25

Ratio of home care clients
to caregivers by state
Sources: US Census & Bureau
of Labor and Statistics
3-3.3 3.3-7.4 7.4-10.3 10.3-14
The other side of the home care opportunity
equation is both the current size and expected
growth in demand for home care services.
Washington state, for example, has an
average size home care population, but the
state is expecting rapid growth in its aging
Underwriting Home Care Cooperatives
population (3.6% more than the national
average). The regulatory environment is also
incredibly important to evaluating the type of
opportunity for a home care cooperative in a
state. For example, New York state currently
has a moratorium on new home care agency
licenses, effectively killing any opportunity to
starting a new cooperative. On the other hand,
other recent regulatory opportunities in the
state significantly incentivize consolidation
of home care businesses, increasing the
opportunity for financing conversion,
acquisitions, and internal growth in the state.
Finally, the market concentration and
size of current competitors in a state can
significantly impact the ability of a home care
cooperative to start up or grow. In general,
14-23.6
the home care market is highly fragmented
with few large players; on the other hand,
future trends point towards significant
consolidation. Like many of the factors we
look at in the home care market a fragmented
market can point to both opportunities
and challenges in a state. States with less
consolidation and smaller sized home care
businesses may signify an easier
start-up environment.
Page 26
 BUILDING COMMUNITIES OF OPPORTUNITY
THAT BREAK BARRIERS TO SUCCESS

Cooperative Development Supports Our Larger Vision

Capital Impact Partners champions social and economic justice for underserved communities,
transforming them into communities of opportunity that foster good health, economic opportunity, and
interconnectedness. Through mission-driven lending, incubating social impact programs, impact investing,
and policy reform, we partner with local communities to help create equitable access to health care and
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2.5 MILLION 253,000 1.1 MILLION 37,000 38,000 870,000

PATIENTS STUDENTS PEOPLE ELDERS AFFORDABLE HOUSING COOPERATIVE CUSTOMERS
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